Selling Parents’ House After Death: Taxes You Need to Know
Understand the tax implications of selling an inherited home, including cost basis adjustments, capital gains, and state-specific considerations.
Settling a parent’s estate can be an emotional and complex process, especially when selling their home. Understanding the tax implications is essential, as unexpected liabilities can arise without proper knowledge.
Tax rules for inherited property differ from those for homes you personally own. Some provisions reduce or eliminate taxable gains, while state laws and specific filing requirements also play a role. Being informed can help you avoid costly mistakes and ensure compliance with IRS regulations.
Step-Up in Cost Basis
When you inherit a home, the IRS applies a step-up in cost basis, adjusting the property’s value to its fair market value at the time of the previous owner’s death. This eliminates taxable appreciation that occurred during their ownership.
For example, if your parents bought the house for $100,000 and it was worth $400,000 when they passed, the new cost basis becomes $400,000. If you sell it for that amount, there’s no taxable gain. If you sell it later for $450,000, only the $50,000 increase after inheritance is subject to capital gains tax.
If you plan to hold the property, getting a professional appraisal at the time of inheritance can help establish an accurate valuation and prevent IRS disputes if the home is later sold at a higher price.
Estate Tax and Exemption Thresholds
The federal estate tax applies to a deceased person’s total assets before distribution to heirs. In 2024, estates valued below $13.61 million per individual are exempt. For married couples, the exemption can be doubled to $27.22 million through the portability provision, which allows a surviving spouse to use any unused portion of their partner’s exemption.
If an estate exceeds the exemption, the taxable portion is subject to rates from 18% to 40%. For example, if an estate is worth $15 million, only the amount above $13.61 million—$1.39 million—would be taxed. The highest rate of 40% applies to amounts exceeding $1 million above the exemption.
Many states impose their own estate or inheritance taxes with lower exemption thresholds. Oregon and Massachusetts tax estates over $1 million, while Maryland has both an estate and an inheritance tax. Inheritance taxes, unlike estate taxes, are based on the recipient’s relationship to the deceased. Pennsylvania and Nebraska impose inheritance taxes ranging from 1% to 18%, with immediate family members often taxed at lower rates or exempt.
Capital Gains When Selling Inherited Property
Selling an inherited home can result in capital gains taxes, depending on the difference between the selling price and the cost basis. The IRS classifies inherited property as a long-term asset, meaning gains are taxed at long-term capital gains rates, which are lower than short-term rates.
For 2024, long-term capital gains tax rates range from 0% to 20%, depending on taxable income. Individuals earning under $47,025 ($94,050 for married couples filing jointly) pay 0%, while those earning above $518,900 ($583,750 for couples) pay the maximum 20%. Most taxpayers fall within the 15% bracket.
Selling costs and home improvements made after inheritance can reduce taxable gains. Realtor commissions, legal fees, and title transfer costs can be deducted from the final sale price. If significant renovations were made to increase the home’s value before selling, these costs can be added to the cost basis. Keeping receipts and contractor invoices is essential for documentation.
If an heir lives in the inherited home as their primary residence for at least two years before selling, they may qualify for the home sale exclusion under IRS Section 121. This allows individuals to exclude up to $250,000 ($500,000 for married couples) of capital gains from taxation. However, renting the property or using it as a secondary home during this period disqualifies the exclusion.
State Tax Variations
Tax obligations for selling an inherited home vary by state. Some states impose inheritance taxes, which are separate from estate taxes and based on the recipient’s relationship to the deceased. Pennsylvania and Nebraska tax non-immediate family members at higher rates, while states like Florida and Texas have no inheritance or estate taxes.
Property tax reassessments can also impact heirs. In California, Proposition 19 limits the ability to retain a parent’s lower property tax assessment unless the home is used as a primary residence. If the property is kept as a rental or sold, its taxable value may be reassessed to current market levels, leading to higher annual property taxes. Other states have similar reassessment rules, making it important to check local property tax laws before deciding whether to sell or keep the home.
Filing Requirements and Documentation
Selling an inherited home requires tax reporting, and proper documentation is essential to avoid IRS scrutiny. The sale must be reported on Schedule D and Form 8949 of the heir’s tax return, detailing the selling price, cost basis, and any adjustments. If multiple heirs inherit and sell the property, each must report their proportional share of the gain or loss.
A professional appraisal at the time of inheritance helps establish a defensible cost basis. Other important documents include closing statements, receipts for selling expenses, and records of capital improvements. If the estate filed Form 706 (Estate Tax Return), the property value reported on this form generally establishes the official cost basis.
Deductible Expenses from the Estate
Certain expenses related to selling an inherited property may be deductible, reducing taxable income or offsetting capital gains. These deductions fall into two categories: selling costs and estate administration expenses.
Selling costs, such as real estate commissions, legal fees, title insurance, and escrow charges, can be deducted from the sale proceeds when calculating capital gains. If repairs were necessary to make the home marketable, those costs may also be deductible, but routine maintenance or upgrades made after inheritance typically do not qualify.
Estate-related expenses, such as probate fees, appraisal costs, and property taxes paid before distribution, may be deductible on the estate’s tax return rather than the heir’s personal return. If the estate files Form 1041 (U.S. Income Tax Return for Estates and Trusts), certain administrative costs can be deducted against estate income. Understanding which expenses are deductible at the estate level versus the individual level can help maximize tax savings.